We are preparing for our 1st private company audit with EY. Besides policy areas, what are the key control issues we need to focus on?

Hi there,

While I can't speak to what E&Y will view as the key control issues, I think most audit firms would look at the following areas as key control areas for a typical company:

Revenue recognition
Accounts receivable and cash receipts
Disbursments and purchasing
Payroll & HR
Inventory
Financial close process
IT controls
Entity level controls

Areas like revenue and inventory won't be applicable for some companies, and for others, debt or investments might be key areas. Auditors will generally look at controls in areas where there is some combination of material dollar amounts, a high volume of transactions, complex transactions or an increased risk of financial statement misstatement. If your auditors are spending a lot of time on controls around prepaid expenses, you should push back.

It's fair game to ask your auditors before the audit starts what they'll be looking for in this area, what you can prepare for in advance and what you can start pulling together for them prior to fieldwork. They may have a matrix or checklist they expect the client to complete for key control areas. If this is the case, this should be given to the client well before the start of fieldwork to allow time to prepare. This should help make the audit process smoother for both the client and the auditor.

I hope you found this useful. Please feel free to follow-up or contact me with more specific questions, I'd be happy to try and answer them for you.

While I think the answer above is very good, I would add the following that have been specific focuses of EY at my company:
1. If you are multi location, EY will look to see that policies re: Bad Debt Reserve, Inventory Reserve, Book Depreciation, etc. are consistently communicated and applied
2. Goodwill and Fixed Asset Impairment - you should have a robust process for evaluating this at least annually
3. Going Concern - are there any liquidity issues? When does your debt mature?
4. Properly accounting for Deferred Compensation

Hope this helps

Good day,both Nathan and Robert raise great points. I suggest that you make sure the following are done first.

1. Make sure all cash accounts are fully reconciled. Including the month before and after your fiscal year.

2. Prepare account analysis for all balance sheet accounts.

3. Have a written explanation or documentation of all debt owed by or to the company.

4. Hold a staff meeting and set up your expectations for interaction with EY, internal controls and communication procedures with your direct reports about how you want information to flow while EY is on site. There should be a single point of contact for EY to funnel there questions through and then your staff should be requested to return all answers through the same point of contact.

5. Keep a running log of all request from EY and update it daily, to maintain a good record of open and closed issues.

I hope this is helpful.

Most likely, E&Y will not be relying on your controls and would be performing a substantive audit (balance sheet approach). it will be important to have significant balance sheet accounts analyzed including subsequent activity if necessary ( accounts receivable (credits). Your question is difficult because you do not inform your reader the industry your company is in. You should have cash flow projections to support operations for the next few years. Such analysis is important to support future debt service, if any and deferred tax assets. Ratio calculations, analytics, and other key metrics will be important. You should get a scheduling letter in advance of the audit to determine and plan for what is needed prior to the auditors are coming. You do not want to waste their time and pay for unnecessary time. You should have a pre-audit meeting so you, your staff are well prepared for your first audit.
The best of luck to you.

I suggest similar to some others have already. Prepare and organize in advance for the audit. Check with the auditors scope of the audit and formulate your strategy accordingly. Communicate with your staff the expectations. The areas to focus in addition to others have indicated include balance sheet reconciliations, payment controls i.e. credit card and p-card reconciliations, foreign exchange, position reporting, transfer pricing procedures, reserves and taxation.
Hope this helps. Let me know if you have any questions.

If your company issues equity compensation awards (e.g. founders stock, restricted stock, stock options, restricted stock units, etc.) be prepared for a spot audit of those awards. Each award on the option ledger and cap table must have a corresponding board authorizing document (minutes or Unanimous Written Consent), plus evidence of a signed award document and/or purchase agreement from the award recipient. If the award required an exercise or purchase price paid by the award recipient, they will want to trace those funds through to the general ledger with documentation of the purchase funds, bank deposit, posting of paid in capital and APIC, where applicable. Auditors I have worked with have been satisfied with all digital records as long as that is the consistent practice for all awards.

In addition, if the compensation expense for equity compensation awards is material, EY will also want to know the basis for the expensing (i.e. how the option pricing model factors were arrived at and how the calculations were done) and if you use an equity administration software program that does the calculations they will also ask for documentation from the software vendor that explains how the calculations are done, along with a SAS70 certification or other similar documentation supporting the software vendor's internal controls and product certifications.

They will also want a copy of the 409A valuation report and, if that has not yet been done, they will want a complete justification of how the board has been setting the fair market value for equity comp awards. And, finally, if you have had any other equity-related transactions, like a bridge financing or private equity offering, they will do spot checks on that, too, so you can expect to coordinate with your legal counsel for that documentation.